FalconZ Articles

Will falling off-plan sales boost completed Dubai property prices this autumn? The Cityscape Dubai
exhibition, the largest property show in the world, is almost upon us. But hardly a day goes by in Dubai
without another scandal hitting the real estate sector or the banks related to it.

You might think that this would be denting the confidence of some would-be buyers. But is it not realistic
to propose that the main impact will be to deflect some of the people who would have bought off-plan
back into the completed property market, and that this additional demand could actually raise completed
prices to even higher levels?

It is a feature of markets that they do not always act in an entirely rational manner. You would think, for
example, that the series of scandals might dampen demand across the board and slow the whole market.
But that ignores the obvious truth that the Dubai economy is booming this autumn and that large numbers
of new expatriates are arriving in town who need to find accommodation. Many, too, have arrived with an
eye to buy in Dubai, and to avoid paying the super high rents of the city, if not now then at least at some
stage in the future by buying an off-plan property.

In the recent past this demand was satisfied by a seemingly endless procession of off-plan projects to
meet whatever the budget or requirement of the buyer. Those who could not find what they wanted
immediately seemed happy to accept a promise from a developer to deliver a suitable property at some
date in the future.
Now the off-plan market is facing a lot of awkward questions and a number of senior executives are in
custody as investigations into alleged irregularities and real estate market misconduct are undertaken. So
even if they are not immediately turning their back on off-plan purchases, buyers are far more wary about
whom they are doing business with and some of the promises that are being made, or at least they
should be.

It is an unfortunate fact of life that all economic booms attract conmen and cheats. Partly this is because
an economic boom induces a false sense of security and makes people more sensible to their charms.
Partly this is because pools of money invite the unscrupulous to take advantage, and people are gullible.
However, most owners of completed property in Dubai have actually bought off-plan and are very content
with the experience. The sale of real estate to foreigners only started in 2002, and so the market was all
off-plan to begin with and this is how it has developed with remarkable success since then. The original
off-plan buyers have been extremely happy with their financial success, even if their property was not
always delivered on time or quite as they expected. Thus it would be irrational for the off-plan market to
be dismissed as wholly unreliable because of the scandals. It has delivered, if not on time or quite to
specification. On the other hand, a concentration of activity back into the hands of proven developers,
perhaps with government backing, looks inevitable.

This will create a new shortage in supply as there will only be so much of the off-plan market that can fulfil
this qualification, and that suggests prices will rise. At the same time there will be buyers who reject offplan
entirely as just too risky, and decide instead to buy completed property. This will increase demand
for the already limited supply of completed property this autumn, and increase prices. But the important
point to note is that this narrowing of the supply of property due to the scandals now besetting the sector
will come at the very moment that demand is really taking off, with the autumn influx of new expatriates.
That might appear a little strange but the scandals are not really affecting the basic argument for buying a
home in Dubai.

Simply put this boils down to it being more economical to buy than rent with mortgage rates falling, the
UAE offering an excellent economic outlook for career development during a difficult period for the global
economy and not wanting to be left out in what appears to be a solid way to accumulate capital while
working here.

House prices have already witnessed some remarkable increases over the past year, and may be the
best globally in 2008. But it may well be that prices stretch still higher, as by certain global yardsticks they
are not yet in the upper quartile, let alone among the highest in the world.

Rental yield is the usual method of determining whether house prices are too high or too low. In Dubai
villas carry a rental return of about five per cent, while small apartments are the best performers with an
eight per cent average yield. By contrast in Central London rental yields fell to two to three per cent in
recent years, signalling real estate prices were high, and indeed they are now falling back.

Given that salary levels in Dubai are not going to increase by more than inflation we can see that rental
prices probably cannot be pushed up by much. But on the other hand, capital values certainly could rise –
assuming that mortgage costs continue to fall and make home ownership more affordable – and that is
what you would expect in a booming real estate market: a gradual squeeze on rental yields as more and
more buyers enter the market.
Moreover, around the world it is becoming more and more difficult to buy assets with a real rate of return,
and so it is logical to suggest that even more money will be attracted into completed Dubai property and
so gradually raise the capital cost and squeeze down the rental yield.
These comments are primarily directed at the residential property market in Dubai but also apply to the
commercial real estate sector, and perhaps even more acutely so as the availability of space is incredibly
tight. If we are going to see less property available in the future because of the scandals then the value of
the property that remains is going to be higher than it would have been.

Perhaps there is only one scenario under which I could see property scandals really impacting on house
prices negatively, and that would be if the problem grew so large that it imperiled the whole reputation of
Dubai as a place to do business. But Dubai has a record of successful expansion and growth of its
business, trade and financial sectors second to no city in the modern world, so that hardly seems
probable.

My conclusion is that home buyers who allow themselves to be dissuaded from buying in Dubai by recent
scandals are likely to regret it as prices still have some room to rise, and the removal of additional supply
by the emergence of scandals and investigations is only going to make prices rise even higher. Only
when the Third Great Oil Boom subsides will property undergo a real correction but that could be many
years away.